Can Endorsement Contracts be Nullified Based on Poor Behavior?
Lochte not only faced potential criminal charges for filing a false police report in Brazil, but his reputation was irreparably damaged. He quickly left Brazil before any police prosecution could occur and eventually received a ten-month suspension from competing from the International Olympic Committee, the United States Olympic Committee and USA Swimming. Lochte also faced the inevitable repercussions of his actions from the many companies within which he had endorsement contracts. The reaction was understandably swift and Lochte lost four endorsement deals: three deals with Speedo, Syneron Candela (a hair removal company) and Airweave (a mattress company) were terminated and one deal, with Polo Ralph Lauren, was simply not renewed. Lochte’s deception and immature behavior cost him substantial current and future revenue.
Lochte certainly embarrassed himself, along with all of the U.S. Olympic athletes, but how do his actions give the endorsement companies the legal right to terminate a valid, binding contract they had with him? A contract becomes legally binding when all of the essential elements are met. Those elements are mutual assent, consideration, capacity and legality.[i]
Mutual assent requires that both parties to the contract agreed to its terms. It is manifested by the existence of an offer to enter into the contract and an acceptance of that offer. Consideration means that each party has to exchange a legal benefit or incur a legal detriment. Capacity is demonstrated by both parties having the ability to enter into the contract; neither party can be a minor or be legally incompetent. Finally, legality refers to the legality of the subject matter of the contract - - the agreement cannot be criminal, tortious or against public policy. [ii] If one of the above elements is missing, then the contract is not legally binding on the parties.
It appears that all of the above-named elements were met in Lochte’s situation as the contracts were all in effect during the 2016 Olympics. Indeed, neither party ever disputed the validity of the contracts themselves. With the validity of the contracts not in question, the only avenue either party could take to terminate the contract would be if one of the parties breached (broke) a term in the contract.[iii]
The contracts between Lochte and his endorsers were entered into by two private parties and as such their content is not public information, making the terms of the contract confidential. However, the inclusion of a “morality clause”, or some form of it, in each of the individual contracts is the most likely explanation as to how the contracts were terminated. These clauses typically allow the company to terminate or suspend payments to the athlete if that athlete acts immorally or is involved in a public controversy. A violation of the morality clause can also include the athlete violating a state or federal law or tarnishing the company’s name because of the athlete’s actions. With social media being what it is today and no one being able to hide from their public missteps, companies that endorse athletes are on high alert to avoid their endorser damaging their company’s image and reputation. Given that Lochte never challenged these companies’ decisions and actually publicly thanked them for giving him the previous opportunities, it is likely that Lochte privately acknowledged his breach of each of the contracts.
Recently, however, Lochte has been on the legal offensive and has sued a company that failed to pay him on an endorsement contract. Following the Olympics and his suspension, Lochte signed a contact with Ember, a pharmaceutical company that manufactures the headache medicine, Migralex. The endorsement deal was for $125,000 but the company refused to pay him. It is unclear why the company did not pay him, but Lochte has received a decision from an arbitrator awarding him the full $125,000 plus fees under the contract. The arbitrator found that Lochte had complied with all of his obligations under the agreement. The company though still refuses to pay him requiring Lochte to file a lawsuit to enforce the arbitrator’s award. The positive news for Lochte is that he has a strong legal ground to stand on with this lawsuit. First, the endorsement deal was entered into after the Olympic scandal so a morality clause argument is out of the question for the company. Second, and most importantly, an arbitrator’s award is extremely difficult to overturn in court. In order to reverse the award, the company would have to prove one of the following: (1) the award was procured by corruption, fraud or other undue means; (2) the arbitrator was partial or corrupt; (3) the arbitrator engaged in misconduct that prejudiced the company’s rights; or (4) the arbitrator exceeded his/her powers.[iv] This is a very limited judicial review and will likely result in a ruling in Lochte’s favor. The company seems to recognize that as well and has publicly stated that they are hoping to settle the matter with Lochte and continue to maintain a relationship with him.
This could result in at least one out-of-the-pool victory for Lochte. But don’t feel too bad for Lochte. Despite his inappropriate behavior and loss of endorsement deals, beyond the above-mentioned potential upcoming legal victory, he also inked a different post-Olympics’ endorsement deal with the cough drop company Pine Bros. to help restore his image. The company has stated that just as Pine Bros is forgiving on your throat, the public should have a little forgiveness for an American swimming legend. That remains to be seen.
[i] Richard A. Mann & Barry S. Roberts, Essentials of Business Law and the Legal Environment 167 (12th ed. 2016).
[iv] Id. at 63.
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